Apple Stock Has No Middle Ground

Long-term investors should sit on AAPL for a year before passing judgment; short-term traders should set specific targets and recognize the big picture

Apple (NASDAQ:AAPL) has been the most closely watched company on Wall Street since the Great Recession. And now that its share price is swinging wildly, it’s in the spotlight more than ever.

But is Apple stock a good play from here?

I believe it is — but only via two very specific kinds of trades.

The first is a short-term bearish swing trade based on inflection points and sentiment, with a holding period of a few weeks tops.

The second is a long-term dividend play based on the scale and value of the company at current pricing, with a holding period of at least 18 months.

The Short-Term Play

Clearly Apple stock is capable of big moves despite a three-digit share price. The stock dropped 25% in a matter of weeks after cresting the $700 mark, then added 15% over a few trading days around Thanksgiving.

These are the kind of movements that can make swing traders a pretty penny.

The tricky part, obviously, is figuring out which way Apple is going to move. And most experts expect that AAPL stock has more downside ahead.

In short, AAPL stock will likely break below $500 in the coming months, and perhaps even push down to the low $400s. That’s where it rested before a 50% run in about eight months from February to September.

That means the current short-term play is to ride momentum to the downside.

One of the most popular Apple options trades right now based on open interest is to buy February $500 puts. Contracts are selling at $22.30 as of this writing. If you have a more bearish outlook in the immediate term, Dec. 28 AAPL $500 puts are $2.95. That’s a very quick expiration, but given the “wiggle” in shares it’s not an absurd idea for the very bearish among you.

The Long-Term Play

Now here’s where it gets tricky: I personally am long in Apple stock and plan to stay that way. The biggest reason? Stability and dividends.

The transition from a divine growth darling into a mortal blue-chip stock is a painful one, and I expect some short-term volatility in shares. But the Apple brand remains one of the most powerful and entrenched in the world, the company is highly profitable and sitting on tons of cash, and — unlike many other tech stocks — AAPL is built on a 21st-century electronics business and not one from a decade or two earlier.

This stock is not going to disappear. And despite downward pressure, I don’t expect the stock to stay below $500 for long. Standard & Poor’s shows a consensus earnings target of $47 for fiscal 2013. Even if that target declines 10% to $42.30 (a decline from the $44.15 tallied in 2012), a price-to-earnings ratio of 12 gives you $507.60 a share.

My personal yield on cost (I bought about a year ago before the breakout) is on par with dividend stalwarts like Coca-Cola (NYSE:KO). And with a dividend payout ratio that is a mere 22% of 2013 earnings, it’s not unrealistic to expect a bump in the dividend within the next year — and continued increases going forward.

In other words, if you’re making the case for entrenched downside, you have to either expect Apple’s earnings to drop significantly or that investors will give this stock a historically low earnings multiple for a long time to come. And you have to expect that dividend investors will shrug at a 2.5% or a 3% yield in Apple and instead hide out in consumer staples or other investments instead.

I just can’t see things playing out that way.

So my advice: If Apple drops under $500, look around and consider a point of entry. Earnings in the next several weeks could be the catalyst; Apple was at $630 right before earnings in October and is now at $530, for a slide of about 15% slide, so we could see another big drop if numbers are disappointing. A buy-in around $450 would be great, and if the downside target of $425 is reached, it’s a no-brainer.

For the record, I think there’s a chance Apple may stay firm — particularly if holiday sales come in strong or the market rallies broadly in the first quarter of 2013. Don’t forget that Apple is fighting against expectations here, not growth prospects, because it remains a powerful company with continued expansion in both the top and bottom line. It just so happens that expansion is not quite as impressive as it once was, which frankly is a day that we all knew would have to come.

And don’t forget the stock is still up handily year-to-date, so many of us who simply want outperformance instead of 50% gains every year are disappointed … but not exactly crying in our beer here.

There are no guarantees that the bears are right and that a breakdown is in the works. But if there is a contraction — or more than one in the new year — I don’t expect it to last long.

Unless some big-time news emerges to make me change my mind, of course.